Lecture 2 - Cost assignment Flashcards
Why do we need to assign costs?
To allocates costs between cost of goods sold and inventory
To aid decision making and help distinguish between profitable and unprofitable products
To ensure all the firms overheads are recovered
Two cost databases firms maintain
For external reporting
For internal reporting
OAR
Overhead absorption rates
Follow the principle of overhead cost divided by selected allocation base
Common methods to calculate OAR
Machine hour rate
Labour hour rate
Common allocation bases for rent, lighting and heating, maintenance or insurance , HR or canteen
Rent - Floor area
Lighting and heating - Bullding volume
Maintenance or insurance - Net book value
Hr or canteen - Number of employees
Calculating apportioned cost
= Total overhead cost x ( Departmental share of apportionment basis / total apportionment basis)
How/ Why we reapportion service department costs?
Cost Objects are in the production departments not service
So once we have apportioned overhead cost to individual departments we then re apprtion the servic le overheads to production departments
Inter service department reallocation methods
Repeated distribution - Allocate specified percentages until figures insignificant
Simultaneous equations- Let x be overhead of department 1 and y be overhead of department 2 and solve
Step allocation - Department that does largest proportion work closed first, then next
Direct allocation - Ignores inter service and reallocated just to production departments
When does under and over recovery of overheads occur?
When actual activity or expenditure is different from planned activity or expenditure
Adjustments for overheads
Adjustment is required in income statement
If too much overhead was absorbed a credit adjustment needed
If too little was absorbed a debit adjustment would be required
